Question

Raner, Harris & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company’s most recent year is given:

							Office
	Total Company						Chicago						Minneapolis
Sales	$	1,050,000		100.0	%		$	210,000		100	%		$	840,000		100	%
Variable expenses		567,000		54.0	%			63,000		30	%			504,000		60	%
Contribution margin		483,000		46.0	%			147,000		70	%			336,000		40	%
Traceable fixed expenses		235,200		22.4	%			109,200		52	%			126,000		15	%
Office segment margin		247,800		23.6	%		$	37,800		18	%		$	210,000		25	%
Common fixed expenses not traceable to offices		168,000		16.0	%
Net operating income	$	79,800		7.6	%

Required:

1-a. Compute the companywide break-even point in dollar sales.

1-b. Compute the break-even point for the Chicago office and for the Minneapolis office.

1-c. Is the companywide break-even point greater than, less than, or equal to the sum of the Chicago and Minneapolis break-even points?

Answer 1

Answer-1(a):

Dollar sales for company to break even = (Traceable fixed expense + Common fixed expense) / Overall CM ratio

= (235,200 + 168,000) / 0.46 = $876,522

Answer-1(b):

Dollar sales for Chicago office = Segment traceable fixed expense / Overall CM ratio

= 109,200 / 0.70 = $156,000

Dollar sales for Minneapolis office = Segment traceable fixed expense / Overall CM ratio

= 126,000 / 0.40 = $315,000

Answer-1(c):

The sum of the segment break-even points is less than the companywide break-even point because the companywide break-even point takes into account common fixed expenses that do not affect the segment break-even calculations.